Moelis & Company (NYSE:MC) Q2 2024 Earnings Call Transcript

Moelis & Company (NYSE:MC) Q2 2024 Earnings Call Transcript July 24, 2024

Moelis & Company beats earnings expectations. Reported EPS is $0.18, expectations were $0.11.

Operator: Good afternoon, and welcome to the Moelis & Company’s Earnings Conference Call for the Second Quarter of 2024. I’ll begin the call by turning the call over to Mr. Matt Tsukroff. Please go ahead.

Matt Tsukroff: Good afternoon, and thank you for joining us for Moelis & Company’s second quarter 2024 financial results conference call. On the phone today are Ken Moelis, Chairman and CEO; and Joe Simon, Chief Financial Officer. Before we begin, I would like to note that the remarks made on this call may contain certain forward-looking statements, which are subject to various risks and uncertainties, including those identified from time to time in the Risk Factors section of Moelis & Company’s filings with the SEC. Actual results could differ materially from those currently anticipated. The firm undertakes no obligation to update any forward-looking statements. Our comments today include references to certain adjusted financial measures.

We believe these measures, when presented together with comparable GAAP measures, are useful to investors to compare our results across several periods and to better understand our operating results. The reconciliation of these adjusted financial measures with the relevant GAAP financial information and other information required by Reg G is provided in the firm’s earnings release, which can be found on our Investor Relations website at investors.moelis.com. I’ll now turn the call over to Joe to discuss our results.

Joseph Simon: Thanks, Matt. Good afternoon, everyone. On today’s call, I’ll go through our financial results, and then Ken will comment further on the business. We reported $265 million of revenues in the second quarter, an increase of 45% versus the prior year period. Our first half revenues of $482 million were up 31% from the prior year. The year-over-year increase in revenues for both periods is attributable to growth across all major product areas. Moving to expenses. Our compensation expense was accrued at 75%, consistent with last quarter. Our second quarter non-compensation expenses were $46.6 million, in line with expectations. Moving to taxes. Our underlying corporate tax rate was 34%, also consistent with the first quarter.

And regarding capital allocation, the Board declared a regular quarterly dividend of $0.60 per share, consistent with the prior period. Lastly, we continue to maintain a strong balance sheet with $191.3 million of cash and no debt. And I’ll now turn the call over to Ken.

Kenneth Moelis: Thanks, Joe, and good afternoon, everyone. Our results this quarter reflect improved performance across each of our major product areas. The M&A market continues to recover and our public company strategic transaction activity has been a significant contributor to our top line this quarter. At the same time, sponsor sentiment and activity is improving. Our restructuring team continues to engage with a steady flow of companies impacted by higher interest rates and moving maturities or structural disruption. Our capital markets business had its best quarter since the first quarter of 2022, and the momentum is strong as hybrid capital is in high demand and the new provision of private credit providers eager to put money to work is a phenomenal opportunity for us to provide independent advice and access to that money.

Turning to talent. Since our last earnings call, we added three managing directors focused on technology, industrials and capital structure advisory. And finally, our backlog across all major products is healthy, and we remain focused on execution as the deal environment improves. And with that, I’ll open it up for questions.

Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Devin Ryan with Citizens JMP. Please go ahead.

Devin Ryan: Thanks so much. Hi, Ken. Hi, Joe. How are you?

Kenneth Moelis: Good.

Devin Ryan: Good. Just a question on the backlog. So we can see at least from the public data. I know it’s not perfect, but we can see kind of an improvement occurring in that data as well. And that’s something we’ve been talking about for at least several quarters now is just the conversion of, I think, the pre-backlog and actually announced backlog and then into kind of realized revenue. So can you give any sense of like how the time lines are evolving? Is there any improvement in speed of things kind of moving through the process of maybe deals that you were previously mandated on or even deals that you’re starting to work on just love some flavor there. And then if there’s any difference between corporates and sponsors, because corporates you mentioned are a little bit more active, but the sponsors have really yet to come back from a revenue perspective. So I just love to get that flavor as well. Thanks.

Kenneth Moelis: Thanks. So look, the pipeline continues to build our new business review, the first step of putting something into the pipeline has had by far its best activity levels. The highest — well, really ever, there was a moment there when we onboarded all the SVB transactions on one day. So that was an unusual moment because it was really an M&A onboarding. But besides that, it’s the highest it’s ever been, including 2021. In terms of the ability to get through the pipeline, it’s still difficult. All deals, it’s not the 2021 environment where deals get to the finish line on their own almost. It’s tough. Every transaction still takes a while. I usually have some complexity, but you can definitely feel the improvement.

It is — by the end of this quarter, the second quarter, it was very different than the end of the first quarter and the conversion ratio, as you talk about and how fast the backlog is moving is speeding up. That’s happening. On your point about public to privates strategics versus sponsors, the shape of the business can be a little different. We do a little more buy side when it’s public, strategics. So the shape of where we get our revenues might be a little different. But I do think the fact that, that part of the market in our environment has accelerated as well as it can – as it has, while the sponsor community really hasn’t come back full speed is a pretty good sign because sponsors are going to have to come to market with their product sooner or later.

And it feels like, lastly, I’ll say with the rotation going on in valuation in the public market, the rotation away from all this value, all the gains in public valuation going really 7 or 8 large cap stocks. And really in the last 2 or 3 weeks, you’ve seen a tremendous rotation into the Russell 2000 in the middle market, that’s much more of a comp for sponsor valuations. As I said, very few of our companies, sponsor companies comp to the MAG 7. They mostly comped to other $5 billion, $10 billion companies in the market and as that value parameter swings, and it swung a lot in the last 2 or 3 weeks, I think that’s a very good sign for activity in sponsor land.

Devin Ryan: Okay. Great color, Ken. Thanks. Just a quick one for Joe on the comp ratio or near [ph] question, but comp ratio obviously flat with the first quarter. I appreciate it might be a little bit early to have a perfect full year view. So I guess what should we read into about kind of where it was for the second quarter being flat? How much of that is just kind of a placeholder? And then what the puts and takes would be to kind of move off of the 75% level. And I appreciate we’re not talking about a normalized level at 75%. But just trying to think about how you guys are framing the full year? Thanks.

Joseph Simon: Yes. So I think I’d first say that the algorithm we discussed in February still persists and is relevant. I’d say that in terms of clarity, visibility, we’ll have much greater visibility on the full year next quarter. And so I think that the way we’ve been thinking about it is that we’ll probably be in a much better position to adjust the ratio at that point. Right now, there’s certainly good positive trends, but visibility is still not — it’s not as solid as it will be next quarter.

Devin Ryan: Okay, appreciate that. All right, thanks. That’s it for me.

Operator: Your next question comes from the line of Ken Worthington with JPMorgan. Please go ahead.

Ken Worthington: Hi, good afternoon. Thanks for taking the question. As we think about election season and the impact that might have, what impact do you think a new administration and a more benign FTC or more deal friendly FTC might have on U.S. M&A activities. So a couple of parts here. One, how impactful do you think the current FTC philosophy has been on getting deals done? And then second, to what extent might there be a pipeline of either deals rejected, withdrawn or never even proposed that seems prime to come to market if we have a more friendly FTC, all things being equal? And I know it’s sort of maybe impossible to answer, but do you think it’s enough to move the needle? Might it be significant? Like any thoughts you have would be valuable to me.

Kenneth Moelis: A very tough question. I like Joe’s answer, which is it will be more clear next year — next quarter after it’s happened, and I can look back and tell you what it was. It’s easy to be clearer after it happened. Look, I do think that if you do have not just a change of regime, but then a change at the FTC, right? You have to assume that if there’s a change, it leads to a change in the FTC. I do think it will open up a lot of deals. Looking back, I think the method has been the government has, I think, instituted these lawsuits. It’s almost to scare people from attempting them. People go, well, you win in trial after 2 years. So why does that matter? And to your point, it matters because the idea was to get people not to attempt things, I think.

So yes, I think there’ll be a bunch of things that would move forward. And it’s hard to know all of them, right? I see a small aperture of the market. But I know of a few that I think would move in a new environment. So that means there must be a multiple of them in other people’s backlog as well. So I do think it would have a significant effect. And then the only other difference would be, as we get clarity on what the two regimes tax rate, corporate tax rate would be, I do think people say these elections matter and I sort of think they don’t and the market matters more, but a dramatically different tax rate for corporations I think, could affect people’s risk-taking capacity.

Ken Worthington: Okay. Thank you. It’s great to hear your views. I’m going to extend like the same concept to outside the U.S. As we think about geopolitical actions outside the U.S., again, sort of election seasons in many different parts of the world, but we also have sort of tensions seething in Asia. Anything top of mind to you either as a catalyst to promote or to track from cross-border international M&A that might result of, again, anything sort of top of mind, geopolitically going on outside the U.S.

Kenneth Moelis: Outside of the general, outside of China, by the way, which is its own specific case, I don’t see that. We’re actually — our European business is very strong and so is our Asian business, and so is our Middle East business. So the answer is I don’t see it, and we’re being pretty aggressive in expanding in all those areas. So outside of the usual geopolitical concerns about China, I don’t see it

Ken Worthington: Awesome. Great. Thank you so much for taking the questions.

Operator: Your next question comes from the line of Brennan Hawken with UBS. Please go ahead.

Brennan Hawken: Good afternoon. Thanks for taking my questions. I hope you guys are well. Ken, curious, we hear from a few market participants that sponsors have begun to reengage in a far more meaningful way. And certainly, when we take a look at the announced activity in the second quarter, it would suggest that. So we’re also hearing more optimism about the back half. So I’m curious what — to hear your perspective on this. We’ve heard optimism before and then it’s gotten delayed or failed to deliver. So what sort of quantum of improvement do you think is reasonable to expect from the sponsor community? And can you give some color and texture on what you think might be driving this optimism and how real you think it is?

Kenneth Moelis: So at the risk of having it put back in my face in 6 months, it feels — we’ve always talked about it, I think there’s been 2 years about people talking about the spring is being compressed and it will come. It feels like it’s in motion. It really does feel different, Brent, and the reason your people are saying it is activity levels are high and they’re real. Transactions are happening. People are preparing to go to market. Sponsors are moving back to the front, pitches are real. They may not be preparing to go out on Labor Day, post Labor Day. Some of them are, by the way, but at the worst, they’re all — there are people thinking of going out between now and the first half of 2025. And it’s real. It’s very active.

The amount of transactions we’re vetting, the amount of pressure on teams, workload is high. And so I think the momentum is there, and it’s real and it’s not projecting. It now does the market. How fast does it accelerate? Does something happen to disintermediate it? And how long and how strong it is, but it’s happening, if that answers your question.

Brennan Hawken: Sure. Is — are there any historical periods that you could — you think are particularly apt [ph] or make sense to draw a parallel?

Kenneth Moelis: Well, it’s — there’s no easy one, but it’s almost a little bit like after the ’08 crisis, there was a real low and nobody, nobody felt like the market was going to come back. There was a restructuring boom between ’09 and ’10. I think there was sort of a year that nothing happened because restructurings were fixed. Now that’s because remember, the ’08 crisis, everything had to get fixed. There was no extension. I think this restructuring pipeline, by the way, is like I think everybody has been saying, it feels extended. It feels like there’s just so much paper out there, that 2% or 3% default rate is a lot of business, and the 3% and 4% default rate is, you know, it’s not a minor move to go from 2% to 4% default rate type of situation.

But then what happened is the market valuations, while nobody is looking at market valuations came back and people got their energy back and something around 2012 or ’13 and ’14 and it just started to accelerate. And I think we’re — we just went through a very — a 2 year period, I mean, it wasn’t a very short period. When you look back on it, it will feel short for all of us on this phone call, it felt like a very long period. But all that’s building up. And I think we’re on — it’s almost like we talked about restructuring a few years ago. I think this will be a long, steady not violent turn. Remember everybody – people used to say, is this a K recovery, a U recovery, a V [ph] remember all those recovery mechanisms people are trying to figure out what the recovery looks like.

And this one won’t be a V-shape, but I think it’s going to be steady, long and pretty exciting.

Brennan Hawken: Got it. That’s helpful. And then maybe just a couple sort of housekeeping items likely for Joe. Joe, was there any pull forward in the quarter? And could you remind or has it changed the sort of state of share creep where if just buybacks are on hold, what happens to the share count over time?

Joseph Simon: Yes. So on the share count, the kind of unaffected amortization is probably around $900,000 per quarter. So obviously, that’s — it would be affected by average share price or by buybacks, but that’s the underlying. And then your first question was about…

Brennan Hawken: Pull forward?

Joseph Simon: Pull forward was, I think, between $6 million and $7 million for the quarter.

Brennan Hawken: Great. Thanks for taking my questions.

Joseph Simon: Sure.

Operator: Your next question comes from the line of James Yaro with Goldman Sachs. Please go ahead.

James Yaro: Good afternoon, Ken and Joe, and thanks for taking my questions. Maybe just on restructuring. I think you were clear that activities remained fairly strong. Maybe you could just give us your outlook on restructuring in the second half of this year and maybe into 2025, given your constructive tone on M&A, should we expect restructuring to start to fall off in 2025? Or is that further out? And then maybe if you would be able to just size the contribution to revenue this quarter from restructuring and capital markets as a percentage of revenue if possible.

Joseph Simon: So if you put them together, and I appreciate you putting it together because we kind of think about that restructuring and capital markets was probably around 30%, and it’s probably been for the first half, maybe a little north of that. By the way, because our capital markets business has had a very good quarter as well, and the backlog there is building. This whole advent of shopping for financing from a variety of private credit sources is very good for our business. Remember, we’re not a bank. And if people want to go shopping and talk to several different like they talk to private equity and they want to be — have independent advice on which capital — private capital source to use, that’s a very good business for us.

And I think that will continue to accelerate. And I think those will stay the same. And the interesting part is what’s going to — what’s bullish about that is I think the M&A business is going to take off at a faster — it’s going at a faster growth rate than it has in a while. And I still think capital markets and restructuring will maintain its percentage as a combined business as if you combine the two. And really, as restructuring tails off, if the economy gets better, that marginal company will probably look to access capital and probably capital that’s cuspy capital or complex capital and it might move from restructuring revenue into capital markets revenue for us. So I think combining them is a good way to think about it.

James Yaro: Okay. That’s very clear. Maybe just turning to the senior banker base. I think the net MDs fell by 2 quarter-on-quarter. Any comments on what drove the decline? And then maybe the outlook for hiring going forward and how this has evolved.

Joseph Simon: I don’t know if it — I have it by year-end and today. So I had it – if you have it at 161, I don’t have last quarter, I have year-end, but maybe you’re right. I think we’ve had a couple of levers and possibly not a lot of starters just in this period, but we’ve — I think we’ve hired more than have left. It’s just a matter of when they hit the starting gate after their garden [ph] leave and all that. That’s the only thing I can think of. We’ve had a couple of — we have had a couple of levers.

James Yaro: Okay. Very clear. Thanks a lot.

Operator: Your next question comes from the line of Brendan O’Brien with Wolfe Research. Please go ahead.

Brendan O’Brien: Hey, good afternoon. Thanks for taking my question. I guess to just follow up on some of the sponsor questions earlier. The commentary has been very constructive and it confirms what we’ve been seeing in the public data. But I just want to get a sense as to what could be the catalyst or that last push to really start getting things going among sponsors and obviously a lot of uncertainty. But when, in your view, do you feel like your revenues will start be at a normalized basis on a quarterly level? Or when do you think you can return to that level as revenues come through?

Joseph Simon: I think there’s two catalysts that could help. Obviously, rate cuts, cheaper capital, leverage capital is still a big part of the ability for private equity to move, so I think that would be — if that were to happen, that would be very helpful. I also — I think this rotation in valuation parameters is very constructive for companies that make up a lot of private equity land. If you think about really, it’s been 2 or 3 weeks now, and I think we’re getting close to like a 2,000 basis point move in large cap value versus, let’s say, the Russell 2000. So it could also be, hey, the company you thought was worth x is actually comping at 20% higher in the market today and you could access that value in multiple different ways.

I think that would change people’s — that might change people’s desire to take their asset to market. And I think those two — and if the two happened to coincide, that would be a very big push. When do I think we get to — I think without those two events even happening, it feels like to me that six months down the road, we should be back in an environment that feels much closer to — it’s happening. That’s about what — I don’t know — I want to say, I think it’s happening and the revenues from what is starting to be kicked into gear, I’m hoping to start to be seen in the next six months, you start to see it.

Brendan O’Brien: Great. And I guess for my follow-up, you talked about the velocity or the conversion of transactions improving. I just want to get a sense as to, I guess, a similar question and they’re related, but what will drive the velocity of transactions may be a bit higher and maybe create that impetus to buy? Is it just deals to get more deals? And it’s as simple as that? Or is there anything else that we should be paying attention to?

Joseph Simon: I think it’s a reflection on what we were talking about. Deals closed quickly when money is available easily and without you know, look, you go back to 2021. Money was readily available, multiple sources at extremely low rates. So that didn’t take any time. And everybody felt valuations were all going one direction and so if you didn’t close on Monday, it might get more expensive on Tuesday. So the whole animal spirits of let’s get this done tends to just accelerate deal tracking. Nobody wants to wait and see if their deal gets sidetracked because they’re excited and optimistic about where the markets are going, and there’s a lot of reasons to get moving on a transaction also to raise your next fund. Let’s get — if we get Fund VIII invested, our investors are ready to fund Fund IX, and that is the business of private equity, by the way, is getting Fund VIII invested and getting Fund IX up – and up and going.

The last 2 years, you’ve been very reticent to invest the last dollars of Fund VIII because you didn’t want to go into this market and see if there was a Fund IX. It was — that’s another thing that would very much add a tailwind in this market is the reliquification of the LP side of the equation from exits. And then as the private equity and the sponsor starts to see that they can go back out in the market and reload, they’ll be much more attuned to putting out the money that they have.

Brendan O’Brien: Great. Thanks for taking my questions.

Operator: Your next question comes from the line of Ryan Kenny with Morgan Stanley. Please go ahead.

Connell Schmitz: Hi. This is Connell Schmitz on behalf of Ryan Kenny. Just considering your comments earlier on the breakdown of M&A versus restructuring for this quarter, there’s still a significant multiple to Dealogic. And I know Dealogic doesn’t exactly have precise data, but there have been reports on potential changes and pushes for changes to transaction fee structures, for example, like fairness opinions and termination fees. Is this something you guys are pushing for and are seeing across the industry?

Kenneth Moelis: I know — look, I saw something actually very recently that transactions are reverse termination fees because of the risk. And I’m not talking about the banker side of it, but reverse transaction fees on the deal side because of the risk of running into the DOJ have gotten larger. I don’t know on the banking side, I haven’t seen a lot of responses to that. I don’t know what you’re seeing. It might be — I don’t know, what are you seeing? Because on special committee, we’ve been — I do think there are people who don’t price their special committee work correctly, but I don’t know if that pricing is changing. We’ve always priced our special committee work fairly rigorously because we understand that it’s a long tail business, and we own the tail. But maybe you can tell me what you’re referring to and I can find on it.

Connell Schmitz: This is an article out of Reuters, but I was just more curious on the go forward as to if there’s pushes given the conversation around deal still remaining elongated around potential scrutiny and like…

Kenneth Moelis: Scrutiny of our pipeline.

Connell Schmitz: Yes. But I guess it really is more to antitrust, which…

Kenneth Moelis: Okay. So what you — look, what you may be asking is, and I have seen a little of this and especially in highly regulated industries, but it’s always been a little that way where you tend to get more of your fee on announcement. You might even get more of your fee on a progress payment because it’s a lot of work and then to wait 1.5 years to get the fee, it’s difficult because the banker has done work 2 years ago, yes, on some of those, but that’s always happened in regulated M&A, especially public company regulated M&A has tended to front-end some fees more than normal M&A.

Connell Schmitz: That’s good color. Just one follow-up on the rate cut discussion. Like how does the potential rate cut affects your restructuring outlook?

Kenneth Moelis: I don’t — I think the companies that are marginally over levered and they can’t make it. Very, very few of them are going to be bailed out by even 100, 150 basis point rate cut. They’re just over levered. It’s the principal and the maturities that are going to hurt them. If, and maybe it’s 5% of the restructuring backlog could be bailed out by 150 basis point drop. That’s where I said, I think you can make quicker, you might be able to make as much, have a better client and do it even more quickly by refinancing that. So if you think about it, if you’re marginally over levered and then rates changed enough that you went from actually restructuring to refinancing, you’re probably not an investment-grade credit.

You’re probably a highly structured private credit opportunity for us to go talk to some pretty aggressive money that on the margin. And so I do think — I think a lot of that will move from talking to our restructuring team, and we do integrate these people together right now into talking to our private capital markets and funding that way. So I don’t think we’ll lose a lot of that business if they marginally are benefited by 100 or 200 point rate cut.

Connell Schmitz: Thanks for taking my questions.

Operator: Your next question comes from the line of Aidan Hall with KBW. Please go ahead.

Aidan Hall: Great. Thanks for taking my question. Most have been asked, but I guess just on the commentary about sponsor activity, and it seems really getting engagement there. Any way to kind of characterize maybe trends in like the small cap, mid-cap and large-cap space as it relates to kind of the sponsor activity?

Kenneth Moelis: I probably don’t spend enough — if smaller, you’re talking about small beyond where we call, I probably don’t know enough about it. I would sense though — my sense because we’re seeing it across the board. We’re not seeing it in the size that we cover from the bottom end of what we covered at the top, a big difference. Other than I think there were some buyouts that were done at the top end of the range, the very large ones that have been successful, so they’re even larger. I do think some of that will exit into the IPO market. That’s a whole different event. And I do think that watching those exits, you might want to watch the IPO market because I think that’s where some of the very large buyouts have to get their liquidity.

But everywhere else in the M&A side of exit capability for sponsors, I don’t see a real difference between the size at the bottom end of what we call on and the top end. But I can’t speak to kind of maybe the size below where we call on might be different.

Operator: And that concludes our question-and-answer session. I will now turn the call back over to Ken Moelis for closing comments.

Kenneth Moelis: Thank you for joining us. I hope you have a good rest of the summer, and we’ll see you on the third quarter call. Thank you.

Operator: This concludes today’s conference call. Thank you for your participation, and you may now disconnect.+